Welcome to the Fifth Edition of Financial Statement Analysis & Valuation. Our main goal in writing this book was to address the needs of today’s instructors and students interested in financial analysis and valuation by providing the most contemporary, engaging, and user‑oriented textbook available. This book is the product of extensive market research including focus groups, market surveys, class tests, manuscript reviews, and interviews with faculty from across the country. We are grateful to students and faculty whose insights, suggestions and feedback greatly benefited this Fifth Edition.

Target Audience

Financial Statement Analysis & Valuation is intended for use in a financial statement analysis and/or valuation course in which profitability analysis and security valuation are emphasized. This book accommodates mini‑courses lasting only a few days as well as extended courses lasting a full semester.

Innovative Approach

Financial Statement Analysis & Valuation is applications oriented and focuses on the most salient aspects of accounting, analysis, and valuation. It teaches students how to read, analyze, and interpret financial statement data to make informed business decisions. This textbook makes financial statement analysis and valuation engaging, relevant, and contemporary. To that end, it consistently incorporates real company data, both in the body of each module and throughout the assignment material.

Flexible Structure

The curricula, instructor preferences, and course lengths vary across colleges. Accordingly and to the extent possible, the 15 modules that make up Financial Statement Analysis & Valuation were designed independently of one another. This modular presentation enables each college and instructor to “customize” the book to best fit their needs. Our introduction and discussion of financial statements constitute Modules 1 and 2. Module 3 presents the analysis of financial statements with an emphasis on analysis of operating profitability. Module 4 introduces credit risk analysis. Modules 5 through 10 offer an analysis of accounting numbers and disclosures. The aim of those modules is to help us better interpret financial statements and to adjust those statements as necessary to improve our financial statement analysis. Modules 11 through 15 describe forecasting, cost of capital estimation, and company valuation.

Flexibility for Courses of Varying Lengths

Many instructors have approached us to ask about suggested class structures based on courses of varying length. To that end, we provide the following table of possible course designs. For instructors desiring greater emphasis on accounting analysis, additional time can be spent on Modules 1 through 10. For instructors desiring greater emphasis on analysis and valuation, additional time can be spent on Modules 11 through 15.

Module

15 Week Semester-Course

10 Week Quarter-Course

6 Week Mini-Course

1 Week Intensive-Course

1

Week 1

Weeks 1(Modules 1 and 2)

Weeks 1(Modules 1 and 2)

Day 1(Modules 1 and 2)

2

Week 2

3

Week 3

Week 2

Week 2

Day 2

4

Week 4

Week 3

Optional

Optional

5

Week 5

Week 4

Week 3

Day 3(Modules 5 and 6)

6

Week 7

Week 5

Skim

7

Week 7

Optional

Optional

Optional

8

Week 8

Optional

Optional

Optional

9

Week 9

Week 6

Optional

Optional

10

Week 10

Week 7

Skim

Optional

11

Week 11

Week 8

Week 4

Day 4(Modules 11 and 12)

12

Week 12

Week 9

Week 5

13

Week 13

Weeks 9 and 10

Weeks 5 and 6

Day 5(Modules 13 and 14)

14

Week 14

Week 10

Week 6

15

Week 15

Optional

Optional

Optional

INNOVATIVE PEDAGOGY

Financial Statement Analysis & Valuation includes special features specifically designed for the student with a keen interest in analysis and valuation.

Focus Companies for Each Module

Each module’s content is explained through the reporting activities of real companies. To that end, each module incorporates a "focus company" for special emphasis and demonstration. The enhanced instructional value of focus companies comes from the way they engage students in real analysis and interpretation. Focus companies were selected based on the industries that business students typically enter upon graduation.

Focus Company by Module

Module 1

Under Armour

Module 10

Southwest Airlines & FedEx

Module 2

Apple

Module 11

Procter & Gamble

Module 3

Intel

Module 12

NextEra Energy, Inc.

Module 4

Home Depot

Module 13

Procter & Gamble

Module 5

Pfizer

Module 14

Procter & Gamble

Module 6

Home Depot

Module 15

Dollar General

Module 7

Verizon

Appendix B

Starbucks

Module 8

Johnson & Johnson

Appendix C

Harley-Davidson

Module 9

Google

Real Company Data Throughout

Market research and reviewer feedback tell us that one of instructors' greatest frustrations with other financial statement analysis and valuation textbooks is their lack of real, contemporary company data. We have gone to great lengths to incorporate real company data throughout each module to reinforce important concepts and engage students. We engage nonaccounting students specializing in finance, marketing, management, real estate, operations, and so forth, with companies and scenarios that are relevant to them. For representative examples, SEE PAGES 3-18; 5-19; 6-22.

Analyst Adjustments

Analyst Adjustments are incorporated throughout most of the modules. These boxed elements explain and illustrate the types of adjustments analysts make to accounting information to make it more useful in their assessment of a firm.

Business Insights & Analyst Insights

Updated Business Insight boxes throughout each module showcase real-world business scenarios through the lens of financial statement analysis. For representative examples, SEE Pages 2-10; 6-6; 11-21. Analyst Insight boxes, in select modules, highlight the importance of analysts' professional judgment in financial analysis as well as with the reformulation of financial statements. For representative examples, SEE PAGES 4-28; 13-6.

Research Insights

Academic research plays an important role in the way business is conducted, accounting and analysis are performed, and students are taught. It is important for students to recognize how modern research and modern business practice interact. Therefore, we periodically incorporate relevant research to help students understand the important relation between research and modern business. For representative examples,SEE PAGES 3-25; 5-32.

Decision Orientation

One primary goal of a financial statement analysis and valuation course is to teach students the skills needed to apply their accounting knowledge to solving real business problems and making informed business decisions. With that goal in mind, Analysis Decision boxes in each module encourage students to apply the material presented to solving actual business scenarios.

Financial Statement Effects Template

As instructors, we recognize that the financial statement analysis and valuation course is not directed solely toward accounting majors. Financial Statement Analysis & Valuation embraces this reality. This book highlights financial reporting, analysis, valuation, interpretation, applications and decision making. We incorporate the following financial statement effects template to train students in understanding the economic ramifications of transactions and their impacts on financial statements. This analytical tool is a great resource for students in learning analysis and applying it to their future courses and careers. Each transaction is identified in the “Transaction” column. Then, the dollar amounts (positive or negative) of the financial statement effects are recorded in the appropriate balance sheet or income statement columns. The template also reflects the statement of cash flow effects (via the cash column) and the statement of stockholders’ equity effects (via the contributed capital and earned capital columns). The earned capital account is immediately updated to reflect any income or loss arising from each transaction (denoted by the arrow line from net income to earned capital). This template is instructive as it reveals the financial impacts of transactions, and it provides insights into the effects of accounting choices. For those desiring a more traditional analysis, journal entries and T-accounts are shown in the margin.

Mid-Module and Module-End Reviews

Financial statement analysis and valuation can be challenging—especially for students lacking business experience or previous exposure to finance, management, and other business courses. To reinforce concepts presented in each module and to ensure student comprehension, we include multiple mid‑module and module‑end reviews that require students to recall and apply the financial statement analysis and valuation techniques and concepts described in each module. To aid students in developing their comparative analysis skills, most of those review problems center on a company or companies that compete with the focus company of that module. For representative examples, SEE PAGES 3-4; 8-12; 11-20.

Experiential Learning

Students retain information longer if they can apply the lessons learned from the module content. To meet this need for experiential learning, we conclude each module with a hands-on analysis project. A series of questions guides students’ inquiry and helps students synthesize the material in the module and integrate material across modules. For representative examples, SEE PAGES 1-43; 3-62; 11-68.

Excellent, Class-Tested Assignment Materials

Excellent assignment material is a must-have component of any successful textbook (and class). We went to great lengths to create the best assignments possible from contemporary financial statements. In keeping with the rest of the book, we used real company data extensively. We also ensured that assignments reflect our belief that students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical tasks. Assignments encourage students to analyze accounting information, interpret it, and apply the knowledge gained to a business decision or in a valuation context. There are six categories of assignments: Questions, Mini Exercises, Exercises, Problems, International Applications, and AnalysisDiscussion Points.

Fifth Edition Changes

The Table of Contents is reorganized to facilitate eLearning, with additional in‑module Reviews and Guided Example videos for all modules.

Expanded and updated Analyst Adjustments and New Assignments supporting the adjustments: The authors have included additional Analyst Adjustment boxes and updated the existing ones throughout the book. Also, this edition includes assignments that require students to use the adjustment techniques, which often includes the reformulation of financial statement numbers.

New regulations: This edition reflects the release of new standards on Revenue Recognition, Leases, Marketable Securities, and all other important accounting disclosures.

DuPont Model: Module 3 now opens with DuPont Analysis (moved from an appendix) as a simple, yet powerful, analysis framework. For those instructors interested, a disaggregation of ROE that separates operating and nonoperating items is shown later in the module as a natural extension of DuPont analysis. Evidence of its usefulness is provided as the authors apply the model and its extension to real companies.

Revenue, Operating Expenses, and Receivables: Module 5 is reorganized and streamlined to reduce its length and focus its discussion on revenue, operating expenses, and receivables.

Receivables and Payables: Module 5 now includes accounts receivable which are naturally paired with revenues. Accounts payable is moved to Module 6 and presented with inventories. A new section on days to collect receivables, days sales in inventory, days to pay accounts payable, and the cash conversion cycle is added to Module 6. These new metrics are applied to actual companies for demonstration.

R&D Costs: Module 6 now includes R&D facilities along with restructuring activities asmany analysts view them as a natural extension of operating assets.

Taxes: Coverage of analysis of income taxes is moved from Module 5 to Module 10 based on instructor feedback.

Equity Carve-Outs: Coverage is moved to Module 9 because many view carve‑outs as a divestiture of a special type of investment and this coverage is set as a new appendix (to reflect their reduced occurrence in practice).

Streamlined Forecasting Module: Module 11 is markedly shortened and rewritten for clarity. It now begins with a concrete example of forecasting mechanics (as the opening section for those faculty wishing to cover just the mechanics and not the refinements). Module 11 uses a new Procter & Gamble analyst report provided by Morgan Stanley, which is set as an appendix.

Updated financial data and assignments: All data and financial statements are updated throughout the book to reflect each company’s latest available financial statement filings and disclosures.

Bond Ratings: Greatly enhanced the discussion of the determination of bond ratings with an example of Moody’s ratings for Verizon.

Expanded Analysis of Allowances Accounts: Added section in Module 6 on accounting for sales allowances, including accounting and analysis of Schedule II allowance disclosures (including effects on sales and adequacy of the allowance account).

Pension accounting: Revised discussion of pension accounting, including a new section on fair valuation of pension obligations, the treatment of pension plans in bankruptcy, and an analysis of pension plans disclosures such as what is operating versus nonoperating (Module 10).

Global Analysis: The sections on global analysis are updated to include new developments.

Peter D. Easton is an expert in accounting and valuation and holds the Notre Dame Alumni Chair in Accountancy in the Mendoza College of Business.

Professor Easton’s expertise is widely recognized by the academic research community and by the legal community. Professor Easton frequently serves as a consultant on accounting and valuation issues in federal and state courts.

Professor Easton holds undergraduate degrees from the University of Adelaide and the University of South Australia. He holds a graduate degree from the University of New England and a PhD in Business Administration (majoring in accounting and finance) from the University of California, Berkeley.

Professor Easton’s research on corporate valuation has been published in the Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Contemporary Accounting Research, Review of Accounting Studies, and Journal of Business Finance and Accounting.

Professor Easton has served as an associate editor for 11 leading accounting journals and he is currently an associate editor for the Journal of Accounting Research, Journal of Business Finance and Accounting, and Journal of Accounting, Auditing, and Finance. He is an editor of the Review of Accounting Studies.

Professor Easton has held appointments at the University of Chicago, the University of California at Berkeley, Ohio State University, Macquarie University, the Australian Graduate School of Management, the University of Melbourne, Tilburg University, National University of Singapore, Seoul National University, and Nyenrode University. He is the recipient of numerous awards for excellence in teaching and in research. Professor Easton regularly teaches accounting analysis and security valuation to MBAs. In addition, Professor Easton has taught managerial accounting at the graduate level.

Mary Lea McAnally is the Philip Ljundahl Professor of Accounting at the Mays Business School at Texas A&M. She obtained her Ph.D. from Stanford University and B. Comm. from the University of Alberta.

She worked as a Chartered Accountant (in Canada) and is a Certified Internal Auditor. Prior to arriving at Texas A&M in 2002, Professor McAnally held positions at University of Texas at Austin, Canadian National Railways, and Dunwoody and Company.

Her research interests include accounting and disclosure in regulated environments, executive compensation, and accounting for risk. She has published articles in the leading academic journals including Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, and Contemporary Accounting Research. Professor McAnally received the Mays Business School Research Achievement Award in 2005. She was Associate Editor at Accounting Horizons, served on the editorial board of Contemporary Accounting Research, and was Guest Editor for the MBA-teaching volume of Issues in Accounting Education. She is active in the American Accounting Association and its FARS section.

At Texas A&M, Professor McAnally teaches financial reporting, analysis, and valuation in the full-time, Professional, and Executive MBA programs. Through the Mays Center for Executive Development, she works with corporate clients. She has also taught at University of Alberta, University of Calgary, IMADEC (in Austria) and at the Indian School of Business at the Hyderabad and Mohali campuses. She has received numerous faculty-determined and student-initiated teaching awards at the MBA and executive levels. Those awards include the Beazley Award, the Trammell Foundation Award, the MBA Teaching Award (multiple times), the MBA Association Distinguished Faculty Award (three times), the Award for Outstanding and Memorable Faculty Member, and the Distinguished Achievement Award.

Gregory A. Sommers is Director of the Master of Science in Accounting program and Professor of Practice in Accounting in the Edwin L. Cox School of Business at Southern Methodist University.

He holds an undergraduate degree in accounting from Fresno Pacific University and a PhD in Accounting and Management Information Systems from The Ohio State University. Professor Sommers is a Certified Public Accountant who practiced in and continues to be licensed in California.

Professor Sommers’ research focuses on market-based empirical studies of the relations between currently available accounting data, expectations of future accounting data, expected cost of capital and valuation. His research has been published in Journal of Accounting Research andJournal of Business, Finance, and Accounting. Professor Sommers serves on the editorial board of Review of Accounting Studies.

Professor Sommers teaches financial accounting, including international accounting, in the undergraduate and graduate programs as well as in executive education at Southern Methodist University. He has taught financial statement analysis and valuation for over ten years at the graduate level and his teaching materials were previously utilized as resources for another textbook in this area. Professor Sommers’ teaching has earned him numerous awards including Outstanding MBA Teaching as well as recognition from student organizations.

Professor Sommers is an active member of the American Accounting Association and its Financial Accounting and Reporting Section. He has served as chairman of the Trueblood Seminar for Professors sponsored by Deloitte. Professor Sommers is recognized as an expert in the areas of financial reporting, financial analysis, estimation of cost of capital, and business valuation.

Xiao-Jun Zhang is the E. R. Niemela Associate Professor of Accounting at the Haas School of Business, University of California, Berkeley. He has served as Chair of the accounting group and the Director of the Center for Financial Reporting and Management at the University of California, Berkeley.

Professor Zhang holds an undergraduate degree from Renmin University, and masters degrees from the University of Maryland and Columbia University. Professor Zhang received his PhD from Columbia University.

Professor Zhang's research focuses on financial statement analysis and security valuation. His work has been published in highly respected research journals including The Accounting Review, Journal of Accounting and Economics, Journal of Accounting Research, and Review of Accounting Studies. Professor Zhang has served on the editorial board of several journals, and has been a reviewer for many others top journals in the fields of finance and accounting.

Professor Zhang teaches undergraduate, MBA, and PhD courses in accounting and analysis. He is consistently ranked among the best instructors by students at the University of California, Berkeley. Professor Zhang is a respected consultant having performed consulting services for several hedge funds. He has also served as an advisor to the Investment Club at the University of California, Berkeley.

Student

Errata - Textbook Last Updated: Aug 27 2018

Corrections to the text that were identified after the first printing.

Do you have a Course ID from your instructor?

No Course ID from your Instructor?

Not all instructors choose to include myBusinessCourse as part of their course. You can still use the videos and end-of-chapter quiz questions. Standalone courses do not include the Homework questions at the end of each chapter.

Are you a new instructor to Cambridge Business Publishers?

eBook Device Compatibility

Our eBook is browser-based and it is our goal to support the widest selection of devices available, from desktops, laptops, tablets, and smartphones.
We constantly test and work to improve our eBook compatibility on as many devices as possible. We recommend that you upgrade your browser to the
latest version and we encourage you to test and preview our eBook on your device before purchasing.

Video Title

Common Access Code Issues

Please ensure that your code is being entered correctly. A common issue is the confusion of certain characters. We tend to see capital "I's" as in Iowa confused with lowercase "l's" like leopard and/or the number "1".

Our access codes do not contain lowercase "l's" (leopard) or the number "1"; in these cases, please use a capital "I" (Iowa).

Another reason may be that you have a used textbook and the code is no longer valid. You can purchase course only access on myBusinessCourse.

If none of these examples represent you, please submit a ticket with a picture of your access code and we will further investigate the matter.

Common Payment Issues

The most common problem we see pertains to the following message: Street Address does not match (N). Postal Code does not match (N).

This indicates that information on file with an issuing credit card company does not match what is entered. We typically see this occur with individuals who have moved recently or individuals using a school address instead of a home address.

Our advice is to contact your financial institution and verify the correct billing information. You may want to ask about any failed transactions and inquire as to the status of those funds.